大都會人壽保險 (MET) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MetLife second quarter earnings release conference call.

At this time, all lines are in a listen-only mode.

Later there will be a question-and-answer session, and instructions will be given at that time.

If you do need assistance during the call today, please press the star followed by the zero.

As a reminder, today's call is being recorded.

At this time, I -- before we get started, I would like to read the following statement on behalf of MetLife.

Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the Federal Securities Laws.

Including statements relating to trends and companies operation and financial results, the market and for its products and the future development of its business.

MetLife's actual results may differ materially from the results anticipated in the forward looking statements as a result of risks and uncertainties, including those described in MetLife Inc.'s filing with SEC, including its S-1 and S-3 registration statement.

MetLife Inc specifically disclaim any obligation to update or revise any forward-looking statements as a result of new informs, future development or otherwise.

With that I would like to turn the call over to John Nadel, head of Investor Relations.

Thanks Kent and good morning everyone.

Welcome to the MetLife second quarter 2003 earnings conference call.

Joining me this morning with prepared remarks are Bob Benmosche our Chairman and CEO, Stewart Nagler our Vice Chairman and CFO, and Lee Launer our Chief Investment Officer.

We also have a few members of senior management here with us to respond the questions including Rob Henrikson, Stan Talby, Bill Wheeler, Bill Kappette (ph) and Kathy Ryan.

First let me update you on a couple changes to our financial supplement this quarter as we continue to provide additional information to help you analyze the company.

In the expense ratio pages for both our institutional and individual businesses, we’ve broken out for you the allocated costs related to pension and other post-retirement benefits.

You can see this for all quarters of 2002 as well as the first half of 2003.

Just to be clear, this is just a breakout of additional information.

Those numbers are still included in our expense ratio.

Secondly, we have provided an additional calculation of book value per share.

As you know, we have historically recorded book value per share based on diluted shares outstanding, the main reason for this are convertible security that we had out standing till this past May.

We added book value per actual shares out standing this quarter because this is the first quarter since our IPO where our actual shares are actually higher than our diluted shares.

This will correct itself in the third quarter and beyond.

This one quarter event has an impact on the book value calculations.

As you can see, on actual shares we have 2% sequential growth in book value on diluted shares that’s 9%.

All this morning we will be discuss certain financial measures not based on generally accepted on accounting principals, so-called non-GAAP measures.

We have reconcile this non-GAAP measure to the most directly comparable GAAP measures in our earnings press release and our quarterly financial supplements, both of which are available on our web site at MetLife.com in the Investor Relations page.

With that, I like to turn it over to Bob.

Thanks, John.

I'm going to give Stew and Lee a chance to cover some of the details.

I want to talk about our operating results so far in the quarter.

Clearly, they're strong.

Just to clear up any questions about our plan for the year, we're still working towards that plan.

It's a lot of hard work to get there, as we said in the first quarter.

Our patent of earnings is emerging, as we said, you will see.

So we expect to achieve that plan and the 17 cents reported in this earnings release will be on top of that plan.

So expect to earn our plan, plus an additional 17 cents as you saw from the extraordinary items reported.

And as we execute our business plan it's very clear the diversification of our businesses are showing the strength we said it would, both from a product point of view in terms of having product array so while variable life sales might be down, we have seen enormous growth in our fixed [UL] product which has a MetLife guarantee behind it which deals with our brand and our strong ratings.

And also from a distribution perspective as we have a strong career agency at MetLife New England [Gm] as well as our third party distribution.

We are not dependent on any one distribution channel.

Lee will talk about the investment portfolio.

You can see the strong trend we talked about in the first quarter repeating and getting stronger in the second quarter so that you see the unrealized loss position is down below $800 million.

Three-quarters of that, a little more than three-quarters is below 20% differential.

Only $111 million is in the age category.

Lee will talk about the components of that as well.

We see that clearly continuing to be behind us as a company.

When I look at the top line, because that's a concern for all of us, to make sure we're growing the company, we can see that we set another record of [new deposits] of 2.9 billion in the second quarter.

We are getting strong sales results from all channels.

While we have not penetrated all the major Wall Street firms as of yet, we expect a couple to be added in 2004.

You can see really strong results here.

On the life insurance side, as I said just before, we are continuing to do very well.

As you see the decline in total life sales, I want to remind everybody that we reported to you well over a year ago that we had a special compensation program that was introduced to General American that had a two-year time frame on it that we had to honor, and we said you would see unusual sales at General American during that two year period of time.

Then you would see a run-off.

You would then see an enhanced compensation program is 20% of first-year premium on top of a normal very aggressive third party distribution commission.

So it was very good commission, very good price.

Those sales are now evaporating, which we thought would happen once the pay was stopped.

We are now returning to much more normal levels in the numbers here.

If you look at our sales of New England and MetLife, for example, you'll see good results there.

We're also seeing a strong quality.

That's because of our strong ratings.

We continue to stay focus on our strong ratings.

Those are the guarantees our company makes to a lot of people and they depend on us.

That's what the brand is all about.

Strong brand recognition.

The guarantees that is represented by that brand.

As you go through the QFS, I want you to pay attention and I am sure you will on to the account balances.

What is key for our business, and we've said this before, is spreads are important.

Also having growing balances is important because you need more assets to get the spreads off of.

Across-the-board you can see very strong growth in our assets that supports the product line we have, which is a result of good new sales and also our effort to continually focus on retention, compliance, and assets.

With the equity markets performing well for us in the first half of this year, relative to the last three years, and we see things stabilizing a little bit with a slight up-tick in the interest rates, we think that we have a good shot at working towards and achieving our plan for the year that we talked to you about in last December.

So a lot of change during the year., but we're still coping with it and doing well.

I will turn you over to Lee who will take you through more detail about or investment.

Thanks, Bob.

Good morning, everybody.

A few comments.

I will start with credit and the balance sheet.

Gross realized losses totaled $188 million in the quarter, which is down from 357 in Q1.

Really, that's the lowest quarterly level that we've experienced in the last three and a half years.

Largest single write-down, about $15 million, largest single loss about 11.

Very broad based, no big issues in that mix.

Realized gains in Q2 totaled $137 million, most of which were taken to reposition certain bonds, and I would note that the realized gain included $25 million of gains from previously written down bonds.

Unrealized loss balance of 806.

That includes the equity component as well. 806 is down from 1.4 billion at the end of Q1 and 1.8 billion at year end.

As Bob mentioned, the unrealized loss aging table shows that only a $111 million of such losses are in that trading below 80 but for more than six months bucket.

That's down from 279 in the prior quarter.

Also, I would have you note that 46% of that $111 million are bonds rated investment grade.

So not completely -- not unexpected given the improvement in the credit markets, particularly in the high yield sectors.

Not unexpected given the fact that we've been aggressive about writing down bonds and aggressive about selling bonds in 2002 and throughout the cycle.

The improvement of values at [the tighter spreads] have been a big positive.

Just as important is destructive volume and liquidity in the markets, credit markets have particularly come back.

This is now giving us the opportunity to more easily position the portfolio into better credits and better structures.

For example we have purchased a significant amount of corporate bonds issued by European obligors as we see particular value in that sector.

While the asset allocation tables and QFS don't show much change quarter to quarter in terms of percentages, there is a lot going on underneath those numbers that we are doing to improve the risk profile portfolio.

Looking forward to credit, we obviously would like to see the credit trend continue.

A little bit of caution.

We would say that much of this really has been technical, and we want to see more evidence of a real business recovery before we're confident those losses on realized balances are going to lay down another significant notch from Q2 levels.

Let me comment on portfolio yields.

Since the drop was a little bit more than -- that you may think it was going to be.

When we modeled the portfolio rollover for rollover new business, for trading activity and for new money rates, we come up with a range of 10 to 15 basis points of yield decline per quarter.

Q1 to Q2, the overall reduction was 27 basis points from 689 to 662.

Lower rates in the quarter, too, and increase rollover in quarter two caused us to be in the upper end of that range, say closer to 15%.

The balance of that decline was due to one-time events which, when annualized, are magnified, in effect.

So the point that I would make is that the quarter, the real numbers in terms of the quarterly drop was more in the 15% zone.

So let me just conclude by saying with the brief remarks that the markets have clearly helped the portfolios rate are up which is good for businesses but not too much and not too quickly to cause any real issues in the portfolio and the trending credit, corporate credit.

When combined with continued strong results in sectors in which we have invest and we really have not talked about much, including commercial real estate, the portfolio at this point in time is in as good of shape as it's been since we started this, truly, historic credit cycle.

So those are my general comments.

I will turn it over to Stew.

Okay, thanks, Lee.

Good morning.

Operating earnings came in at $651m this quarter, or 89 cents per diluted share, and included some positive items outlined in our press release, which Bob mentioned earlier.

Our results this quarter continue to reflect very strong fundamentals.

We maintain pricing discipline and several very competitive product areas, and this is reflected in our strong underwriting results.

In addition, our focus on maintaining spreads is clearly evidenced in several product lines, most notably individual annuities and retirement and savings, reflecting new sales at current market rates as well as continuing reduction of credit rates on enforced business.

We continue to focus on managing our expense levels, especially in light of the impact of higher cost to related pension and other benefit-related expenses and the expense associated with employee stock options.

Our capital value continues to grow strongly, and on a statutory basis, the total adjusted capital of metropolitan life, which is the numerator in the risk-base capital ratio, grew roughly $1 billion during the first six months of the year.

We continue to have the capital necessary to grow our businesses and, at the same time, support our strong ratings.

Consolidated premium fees and other revenues totaled $6.04 billion in the second quarter, up almost 9% from the prior year period.

On a year-to-date basis, we're up 8% versus the first six months of '02.

In addition, as you know, the close block makes up a fair amount of our revenues, and, by definition, the close block is not growing.

If we exclude the close block premiums from the numbers I just mentioned, our top line grew 11% on both the quarter and a year-to-date basis versus '02.

Turning to the operating segments, institutional business, operating earnings were $260 million.

Up 4% from the prior year period and 19% sequentially from a low first quarter.

Drivers of sequential earnings growth included top line growth at or above our targeted levels, a continued focus on maintaining investment spreads and strong underwriting margins.

You can see that our spread in the retirement savings product line, which was a focus during last quarter's call was 145 basis points, and we still expect the full year to come in around 125 to 140 basis points.

In individual business, operating earnings were $182 million, down 7% from the year ago period, but up 14% sequential from the first quarter.

Adjusting for our change in capital allocation, this segment's earnings were, roughly, flat versus the prior year period.

Earnings in the current period benefited some very strong mortality results, and from the 15% rise in the equity markets.

Separate account balances grew nicely, favorably impacting the [M&E] fees we charge.

Additionally, back amortization slowed, and our reversion to the mean rate dropped from 14.07% in March to 11.53% at the end of June, reflective of the improved equity market performance.

On the general accounts side of the business, we continue to focus on maintaining investment spreads, and you can see that our annuity spread remains in the range of 200 basis points, and with crediting rates roughly 120 point above the weighted minimum and the upcoming implementation of lower minimum on new business, we have ample opportunity to hold these spreads going forward.

Looking at sales in individual business.

With the exception of variable life where sales are down significantly industry wide, -- industry wide, our sales remain strong.

Universal life insurance sales were up 45% versus the year ago period and 29% sequential from the first quarter.

Annuity sales remain very strong with deposits up 59% versus the prior year period and 12% sequentially.

Given the difficulty of selling certain fixed annuities at an appropriate margin, our fixed annuity deposit were down 20% sequential from the first quarter of 03 as we pulled certain offerings.

We don't expect to see sequential growth in fixed annuity sales for the remainder of the year, even as we introduce new minimums from our contract effective September 1.

Rather, we continue to focus on variable annuity sales growth through all channels, including MetLife investors and our Asian channels.

In our order and home segment, operating earnings were $42 million, up 17% from the year ago period and up 40% sequentially the first quarter.

While [CAP] losses were higher in the second quarter, our efforts to mitigate volatility over the past couple years, which we have discussed with you, have proven effective.

The implementation of higher deductibles, improved agency management, and better geographical diversification coupled with a strong reinsurance program continue to help us manage the risks inherent in this business, while producing improving returns.

Pricing actions continue to drive results as our average earned premium per policy was up nearly 11% versus the year ago period.

And with retention stabilizing around 87%, this continues to bode well for profitable growth going forward.

Our international segments operating earnings were $102 million, up significantly versus both the prior year period and the first quarter of '03.

Included here were two positive items that we would not expect to repeat prospectively but which both contribute to the return on the investment in [Hidalgo] last year.

The first is a $40 million release of deferred tax valuation allowances resulting from the merger of our two companies in Mexico, Hidalgo and MetLife [Henesis] into MetLife Mexico.

The second item was a $22 million after-tax reduction in policy holder liabilities relating to a change in reserve methodology on certain insurance contracts.

Excluding these items, international operating earnings were $40 million for the quarter.

In our corporate segment, you can see the impact of the partial release of the race conscious underwriting reserve.

This totaled $64 million after tax, and is the primary reason this segment's earnings came in well above our normal expectations.

So, in summary, while it continues to be a very difficult operating environment, we're confident that our diversification, brand recognition, strong ratings, and disciplined approach to underwriting and expense management position us favorably to deliver against our objectives.

That concludes my remarks, and I'll turn it over to the operator now.

Thank you.

Ladies and gentlemen, if you do wish to ask a question, press the star followed by the one on a touchtone phone.

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Our first question comes from Ed Spehar with Merrill Lynch please go ahead.

Good morning.

I want to follow up on the comments on the yield decline.

I was wondering-- can you give us a sense of the 10 to 15 basis point per quarter which, I think, you are talking about sequentially.

Is this based on current rates, or was it based on where we were at the end of the quarter?

Can you give us any sense of how much is related to new money versus the in force business.

Then related to this, on the crediting rate side, Stew, you gave us the number, I think, on fixed annuities about the weighted average crediting rate versus minimums.

Can you also give us a number on UL?

Is there any flexibility at all in that 592 average crediting rate in the institutional retirement savings business?

Ed, Lee Launer here.

Let me take that first part on the portfolio drop.

When we model this, we take into account all of those factors that you mentioned, and that's where we came up with expecting and looking at around 15 basis points for quarter 2, which, as you will remember, was decline in rates during that quarter.

We are back up now, but a decline in rates during the quarter.

We had a little bit more rollover than we would have in the other quarters.

That contributed to the 15.

Normally, what you would see is around that 10.

In fact, if you go back and look at the average over the last five quarter, you will see a 10 or 11 in that area.

This quarter was a little bit different.

When you look at the breakout between new money and rollover, it is about, roughly, 50-50 between those two factors contributing

With respect to Universal Life, we also have about 120-point margin over the guaranteed rates on a weighted average basis.

So, again, it is about the same flexibility we had in the area.

When it comes to the pension business, the institutional pension business, we don't have nearly that amount of flexibility.

You know, something around 20-30% of that business we have flexibility to move rates down, and so we clearly can achieve the margins.

On the remainder of the business, we don't have the flexibility because a lot of those rates are locked in, but we operate in an asset liability matching basis.

So it is not as sensitive as you might think in a situation of a perfect match things wouldn't move at all.

So we tend to be able to keep those margins up pretty well

By the way, I can attest to your risk mitigation efforts in PC given you dropped me as a customer.

It’s the car.

I don't think we'll comment on that one.

Your next question comes from Vanessa Wilson from Deutsche Banc.

Please go ahead.

Yield guidance.

Is that based on March 31 interest rate or June 30 interest rates, given the backup in rates in second quarter?

Vanessa, you were cut off. at the beginning Could you repeat the question?

Yes.

Ed's question related to the level of interest rate you are assuming in your 10-15 basis point guidance.

Does it contemplate the increase in the rates we've had recently?

I'm sorry.

I didn't answer that question.

We would be where the interest rates are now. 15 was more of a result of where we were averaging during the quarter, which, as you know, was probably 75 basis points below where we are now.

Okay.

Thank you.

Lee, could you also comment on how much cash you have available to take advantage of your better investment opportunities?

Yeah.

I thought that question might come up.

If you lock at the balances on your QFS, you are seeing cash in short-term investments.

And also a lot of treasuries?

And a lot of treasuries.

Let me take the cash in short term.

I did want to make a point about that.

It is $8 billion plus.

The point I would make about that is of that amount, $5-6 billion of that is backing liabilities now, and many of those are short-term liabilities.

So those are not available, if you will, to be moving out the curve and taking advantage of higher rates.

We would have to move something back, in other words.

So I would look at that as $5-6 million of that of that amount already invested.

The rest is general corporate liquidity that we have.

That's a function of what is going on in that particular day, cash coming in the day before and cash going out the day after and so forth.

So that is a very small percentage of that is available to move into the market.

So the main areas of cash that we can move into the market is from the cash flow that comes off the portfolio every month.

You mentioned treasuries, I have asked about that and looked at that pretty intensively.

Those are, in fact, backing liabilities.

They're earning good spreads, particularly when you effect securities lending that we can earn on those.

They play a very, very important role when it comes to duration matching.

We like those where they are at this time.

Okay.

In the Annuity business, you had nice sales in the variable business.

It looked like it went into the fixed option.

What's the duration matching there?

You know, in terms of the fixed option, it goes into the same pool as our fixed annuities.

The duration is three years.

We keep it relatively short so the credit greats can move in the direction the market is moving relatively quickly.

What about your reinsurance on your annuity benefits, the [GMIB and GMVB]?

We continue to reinsure 25% of that.

Do you have any capacity left or will it run out in the third quarter?

It should run out at the end of August.

We're looking at entering into a new reinsurance arrangement.

Thank you.

Just keep in mind on that, moving to the general account, one is we have a lot of flexibility there because it is an annual rate reset on most of that business, and it really gives our clients, I think, a superior product in that they're getting a better yield where most of the other competitors have variable products need a money market rate.

I'm not sure there's some cases we've heard of where they're charging clients to keep their money in a money market.

This is a good yield for people.

It gives us a lot of flexibility.

This is good for the client and good for the company.

Thank you.

We have a question from Nigel Daily from Morgan Stanley.

This question is on dividends and your improved capital position.

Are you contemplating boosting your dividend on your payout ratio.

You are below your peers.

Second, with retirement and savings, premiums and deposits growths appear to be very strong this quarter increasing at over 30%.

What drove this growth and what can we expect going forward?

Lastly on annuities [verbal] annuity growth is obviously is very strong.

Do you have a percentage of [verbal] annuity of sale that is included the guaranteed minimum income right around that?

Thanks.

The whole issue of capital and what we do with it and so on is being discussed.

We will look at dividends in the fall with our board of directors.

The primary goal right now for the company is to maintain our strong ratings.

It is about the guarantees we make, and it is what our brand is all about.

That's our first priority.

We will then take a look at dividends and stock buyback programs.

Once the rating agencies are comfortable with our position.

Then we will think about what is the right thing to do in this climate in terms of having the right flexibility [for the right things] in terms of our shareholders.

We have not drawn any conclusion yet and we won't have an answer until we get together in December at our annual meeting.

Great.

Thanks.

Hi, Nigel its Rob Henrikson.

If I understood your question correctly, in terms of premium fees and retirement savings, as you know, we have some lumpy results because of what premium fees represent.

This time very driven by structured settlements were up considerably and attractively, I might add.

In terms of what we call our financial solutions, which would include GICs.

In the GIC community.

At GIC market place for the sponsor community we're holding back a little bit because of spreads there that are not particularly attractive.

But in the global GIC market we have seen some real opportunity there and continue to exceed our 15% ROE targets and so that's been growing nicely.

On the annuity growth, in terms of GMIB, its about 51% of our new sales have GMIB features that varies quite a bit by channel.

At the low end would be the MetLife sales force, at less than 15% of our sales.

At the high end, at MLI, MetLife investors, probably close to 70%

To put that into context, do you have numbers for the prior quarters?

It is about the same.

Thanks.

Thank you.

We do have a question from Jason Zucker with Banc [State Capital].

Thanks.

I had a couple questions.

Stew, could you help us out and put a range around where you think risk base capital might have ended given you added a billion or so of equity to the numerator in that calculation.

Then with respect to portfolio yields, if rates stabilize today, what I was wondering is, how long before the investment yield also stabilized?

Let's talk about risk base capital.

First set the ball where it was last year end.

Last year end on a New York basis we were at 280.

On an NEIC basis, 293.

So comparable to other people.

The number was 293.

All other things being equal, the billion dollars of addition of capital would raise that ratio roughly 20 points.

So -- you know, things continue to move around, and those why we don't like to, you know, pinpoint every quarter what the RBC ratio is.

Clearly, that capital improvement gives us an improvement in our total position something like what I outlined.

It certainly improves.

Throughout the year, lots of things happen and we're constantly monitoring our capital position and discussing it with the rating agencies to make sure that they're comfortable with where we are.

Jason, Lee Launer here.

Part of the answer to your question is how fast we in fact trade the portfolio to trading the portfolio will bring down the yield as well.

Absent that, although we do trade the portfolio, you know, if you add in -- if you average in the 11 bp per the quarter and run out and look at the 675 or 680 we're at now in terms of port portfolio yield and where we are, it takes three years or so to run this back down to the numbers we're seeing in the market today.

Okay, great.

Thank you.

We have a question from Colin Devine with Smith Barney.

Please go ahead.

Good morning.

I have a couple quick questions.

First I was wondering if we could talk about the expanding size of your mortgage backed security portfolio which is up I guess year to date about 20% versus 13% for the fixed income and how you are protecting yourselves against extension risks on that.

Second, if we might then flip to individual life sales.

I appreciate the breakout [Inaudible] but as I understand industry sales are flat to up about 5% for those two products overall this year.

I think you're down 20.

Lastly, if you could give us some update on the status of your mortgage on the Sears tower and where things stand with [Transcan] (ph) and if you're going to take back that property

Lee will talk about the mortgage back.

I think the best thing to do, Lee, would be to really give a sense -- we normally don't do this.

I think you want to give a sense -- we talked about this being against the Annuity product which has great flexibility.

You also might want to talk about our securities lending program so that Colin can dissect it a little bit to see what it's up against.

All right.

Let me dive into mort mortgage backed securities.

The first thing one should do is when you look at the category, we have $8.7 billion of CNBS, commercial mortgage backed securities, in that category.

Those are vastly different than RMBS so those should be stripped out.

That should be known--

To interrupt, can we get that split thing going forward in your statistic supplement?

Colin I think we going to break it out in the Q. When we do that we'll break it out in the supplement.

Yeah.

I appreciate that.

I think the key statistic I think that we would like to convey is the fact that of all of the mortgage backed securities, 80% of all our mortgage backed securities are in portfolios where the liability rates reset at least as frequently as annually and, often times, monthly.

So we have a lot of cost to fund reset ability on our mortgage back securities. 80% of them are.

That is true with securities lending which, I believe, when you look at the QFS, you can see that we've ramped that up fairly significantly over the last half of the year.

We have used mortgage backed securities extensively in that portfolio.

Much of the growth in MBS.

That is a portfolio that, certainly, the liability rates reset quite frequently.

That goes into that category, that 80% category.

Let me comment, if I could, on the Sears tower.

We are in dialogue with [Trisec].

We have been since investor day.

We don't have a transaction to point to.

There's nothing I can say in terms of something to point to.

All I would say is that we're working quite well with Trisec.

We are on the same page with that company.

There won't be any surprises if something does happen, and we will continue to work with them closely.

What is the size of the mortgage and if you've recognized any impairment on it?

The size of the mortgage, $600 million.

We own 525 of it.

We want 525 of the 6.

We have not impaired that mortgage simply because of the fact, one, it is paying.

Two, we believe the collateral value exceeds the principal amount of that loan.

Colin, it is Rob Henrikson.

On the life sales, in a general way, the best way to look at it is, as you had pointed out, variable life sales are down, universal life sales are way up.

If you look at the different distribution channels, it is a little bit different story.

It is a very positive one.

If nothing else, focusing on both the diversification of our distribution and types of products.

So what you have is at General America, sales are down.

In the MetLife channel, you have a very, very strong up-tick in Universal Life sales, almost three times year-over-year.

In terms of individual life there, they still are, basically, selling about one-third of their business, is whole life.

In the New England channel, you have a channel that was very, very dependent historically on variable life sales.

Getting them retooled and focusing on wholesaling into that channel has paid big dividends for us because Universal Life sales are up there dramatically and the New England sales force historically has only sold about 10% of their sales through traditional life.

So the trend in terms of the sales patterns are excellent in Universal Life and variable life and fixed products in general.

Variable life is down.

I'm not sure exactly of the numbers that you gave, relative to the statistics, but if we are down at or more slightly than the rest of the market, it is not surprising given the mix of business, particularly in the New England channel in the past.

So I hope that answers your question.

I think you also have to keep in mind, as I said earlier, that we are seeing the drop-off at General American because of the compensation program that was around for the last two years.

It was costly program.

When you send third party distribution with 20% first-year premium, on top of normal commission you are going to get accelerated growth, but we're now back to where we're -- where we actually have normal growth and the right margins and the products and we're perusing forward.

It is a blip in the numbers that affected General American and had some effect on New England and MetLife as well.

Do you have any new products coming up at the last [guarantees] or anything like that, that may help fix sales up little bit more during the second half?

I think the UL product that Rob talked about is absolutely a strong product.

Its sales are strong.

Look at the numbers sequentially, and you will see that product continuing to move forward.

The key here -- it is our strength.

It's the MetLife guarantee.

Also, you'll see that we've got a fairly competitive whole life product as well.

Bill, do you want to comment?

Bill Wheeler.

I will say I think the UL product, we just recently revised our UL, secondary guarantee product.

We think it is a good, competitive product.

We expect it to be higher in the second half of the year.

We're also running into some good comparisons versus the third and fourth quarter last year.

Our whole life is a very strong product for us.

I think you're seeing agents -- despite the resurgence in the stock market, the agents and their customers like the idea of the guarantees and yields that whole life can provide.

I think we're going -- we feel good about the second half of the year and where sales are going to go

I think the effective business mix, Colin, as much as product feature, is something that will drive things much more strongly.

I can't overemphasize the change in the mix in the channels toward a product that previously was not selling at all.

It is not a question of additional features to grab sales.

It is grabbing the attention through better wholesaling on our horizontal look to the channels.

Also, the -- keep in mind that we have other products doing well annuities are doing strong in this channel.

Long-term care continues to be a strong growth for us and continues to do well.

So our numbers, while we as a corporation did very well and driven by the federal program that we signed up, clearly beyond just the federal government we have a lot of other strong growth in long-term care.

So its across the board we see good sales results there.

Annuity sales by the way in the MetLife sales in New England are both, we talked about MLI quiet a bit but the other two channels are up well over 20%.

Thank you.

Thanks.

We have a question from Tom Gallagher with CSFB.

Please go ahead.

Good Morning.

Three questions.

First is for Lee.

You talked a little bit before about some modest portfolio repositioning or, at least, getting into European corporate.

Can you speak about the way you look at the portfolio and any changes we can expect over the next year or so?

That's the first question.

The second question is, can you give us an update on asbestos claims for this quarter?

The last question is just on the spread issue for fixed Annuities.

I would imagine there is a real difference on your spread that you are getting on your pure fixed annuity block versus the fixed [bucket] with in the variable Annuity contracts.

Can you talk about the relative difference in those spread levels?

Thanks.

I can take the first part of that, if you don't mind.

I don't know about projecting out a year.

Let me talk about what's taking place now.

As I referenced in the opening comments, the marketplace, given the volume and the liquidity in the market has given us the opportunity to reposition the port portfolio or at least its make changes that we've seen in the past.

The structure trades, the European trade is there.

Also, a lot of the bond that is have been depressed in value have come back a long, long way.

We have the opportunity now to maybe trade out of those into other securities.

So I don't think that we're projecting any major asset allocation shifts.

It is much more of within the assets themselves trading up in structure.

On the asbestos front, two things.

One is that we are actively involved in the legislation in Washington.

That is proceeding.

So we still believe there's a good shot you will see some legislation in the fall.

Great support by the Senate, in particular.

Many of the senators there.

Having said that, for ourselves we'll report year-to-date through June about 48,000 claims.

However, I want to stress that in the month of April, we received one block of claims of about 20,000 it came from a group.

We haven't sorted through those yet or what they mean that really you would look at just the one anomaly in April.

That would leave us 28,000 for everything else for the first six months.

This is where people are scrambling right now.

I said this before, to get their claims in before any legislation or any possible claims in or remote possible claims in because, if they're in, they get covered for the legal fees.

If they're not in, they won't be covered going forward.

Occasionally, you will see some law firms get a lot of stuff done and get them in.

This was an unusual blip in the month of April.

The pattern looks normal to where we were last year.

Bob, just a quick follow up to that so if I'm doing my math correctly, that's about 31 or so thousand claims for Q2.

So if we strip our and assume the 20,000 was sort of a one-time event, what you're saying is it would be more of a normal quarter?

No.

The 48 is year-to-date.

That's for six months.

Right, right.

What I was saying is, just looking at what happened in 1Q, the result in 2Q is, roughly, 31,000 new claims?

Including the 20.

Okay.

Thanks.

Tom, this is Stan Talbi.

Just to answer your question on fixed Annuities versus the fixed bucket.

We have pulled a lot of the fixed Annuity product with short durations because we are not getting our spread.

The only things out there are long duration Annuities.

Our sales as you can see have gone down.

We expect them to continue to go down in the second half of the year.

In the fixed bucket variable Annuity, it is part of an aggregate contract.

While we're not currently getting our spreads on the fixed bucket as we lower the minimum guarantee to 1.5% and decide where to place that rate, it will be below 3%, and we'll be back on track beginning in September.

Thanks.

Tom, by the way, we have reduced the minimum guarantees on the -- in the bank channel on about 50% of our business.

So, really, the story on spreads on the Annuities in general is on the liability side in terms of what kind of product you offer, how aggressive you are, and, as Stan indicated, the mix of our business is moving such that we can maintain that 200 plus basis point spread.

I think the important point here to keep in mind is as we have growing balances, we have minimums coming into play, which gives us flexibility going forward.

We're going to see the spreads continue to be supported against the higher balance.

That's what you need to think of when you think of the second half.

Okay.

Thanks.

Thank you.

We do have a question from Andrew Kligerman from UBS.

Please go ahead.

Quickly, the rate of change in your pricing in both the property and auto.

Secondly, mortality seems particularly good at, roughly, 88% of expectations in individual and your loss ratios is real strong in the institutional.

Can you speak to the sustainability of those ratios and how much was unusual in the quarter?

First, in the home segment, we continued to increase rates quite strongly.

You saw the average increase in premium per policy, which I mentioned earlier.

That has a carryover that will continue to increase per course of the rate increases we've already been putting -- we've already put in effect.

So you'll see the average premium per policy continue to go up.

In terms of rate increases that were implementing now, if you average it out, you're still talking about double digit rate increases in total.

So you'll see rate increase activity to move forward.

One of our strategies is make sure we stay ahead of trend and keep your margins up.

You are comfortable you will remain under the 100% targeted combined ratio?

Yes.

We know we need to do that and, certainly, the pricing is in place to do it.

We also, as I described before, have a lot of volatility management things in place to be able to manage things to the extent you can.

In terms of the mortality and individual business, it was a good quarter.

This moves up and down.

Obviously, you can't be -- it can't be predicted.

In terms of the results this quarter, they clearly were better than, you might say, average.

How is it going forward we'll see as it emerges.

Again, you know, we have -- our underwriting discipline is strong.

We use reinsurance where we think it is appropriate.

But you will get fluctuations in mortality.

That's part of our business.

Unfortunately, the fluctuations were in this quarter.

If the first quarter we said our mortality was worse than expected.

Stew said, it does vary from quarter to quarter.

In the group life segment, we have been operating in a narrow range, between 92-94%.

So we are at the lower end of the range.

We've experienced good mortality there consistently based on good underwriting and pricing.

Thanks.

I would add to that, Andrew, one of the things on the group side, too,.

Keep in mind you are managing several levels there.

I think the term life is particularly strong there, which links to what the performance is on the mortality as well.

So we're managing both sides of that.

Thanks a lot.

Thank you.

We do have a question from Suneet Kamath from Sanford Bernstein.

Please go ahead.

Two questions.

On the variable life sales, can you talk about what needs to happen industry wide to get those sales up again?

How much is market related and how much is state tax related? if it is state tax related, what are you hearing from Washington on that issue?

The second is on the retirement savings business, particularly the GIC business.

One of your competitors last week talked about irrational pricing in that market.

Can you talk about what you're seeing there?

Thanks.

To answer your question, this is Bob Benmosche.

On the variable life sales.

There is no real solid answer other than to say you have people who sale guarantees and they got involved in selling market returns.

As you've seen with stock markets, when you burn your book, you burn your book.

This has been a long-term drop in the market.

It's affected people's attitudes across a broad range of products.

Keep in mind that for those of that are around in the crash of '87, a 35-year-old was feeling pretty good and realized, if they survived, didn't have much money in the market and began to buy in the dips and do some other things for years after the crash of '87.

The problem is now that 35-year-old is 51 years old.

They are now saying that we don't have as much time and are not as optimistic about the future.

Now they are starting to say to themselves that can I afford the market risks because look what happened to my portfolio and my futures.

I think you're seeing a strong fundamental change away from markets and looking for more predictability and more guarantees and promises.

That's where the brand comes into play and the financial strength of the company comes into play.

I think we have seen a dramatic change here.

And its not going to go away.

Most of these people were affected by the markets in the last 3.5.

It wasn't a handful of people affected in the '87 period of time.

I think you'll see a change.

In the enormous popularity of our fixed products in the MetLife’s guarantees including variable Annuities , they say, look.

I want some money in a fixed account that will always going to be there.

There is a change that we're benefiting from right now.

Rob, do you want to talk about the irrational pricing.

I'll make a general overall comment that in the employee benefits marketplace it doesn't take much to get noise in the business on irrational pricing, whether it is group life insurance or GICs and so forth.

In the GIC marketplace, as I mentioned before, we are -- we have pulled back or we are being more conservative in the pricing, and we have seen some rather aggressive moves on the pricing side.

We have answered that by not answering the challenge to that kind of rate but have picked up on the global GIC side substantially, well over 200%.

We are seeing attractive yields on the global GIC side and some aggressive pricing on the employee benefit side.

A follow up on state tax.

Any update that you can provide on that?

I think none of us have any update yet as to what could possibly happen.

All we know is there is doubt.

Thanks.

We do have a question from Michelle Giordano from JP Morgan.

Please go ahead.

Good morning.

You talked you have a fair amount of flexibility in lowering credit rates on your [N64] Annuity business.

I am sure it’s a fine line hat you have to manage.

How much flexibility do you really have before you run the risk of customers start tog withdraw from this the fixed Annuity.

Second, on fixed Annuities, how much appetite is there from consumers for fixed Annuities with a 1.5-2.5% crediting rate?

Third Bob, you highlighted you are going to add some new distribution channels in 2004.

Can you highlight what some of those specific arrangements are?

Let me take the last one first.

We have not -- I am not prepared to announce the names of the companies.

They are in the top five or six Wall Street firms that have strong retail franchises that we are not in yet.

We're into active conversations, and we think we'll add substantial production to those two channels as we move into 2004.

We don't have a commitment from both of them just yet.

Therefore, I can't reveal their names.

Michelle, in terms of the flexibility on the crediting side, as Stew mentioned, on average, we are still about 120 basis points over the minimums which, generally, are 3%.

For some blocks they're 4%.

Certainly, we do have to balance fairness to the policy holders versus our desire to maintain spreads.

I would say at the rates we're resetting money that's rolling over, policy holders are getting a fair rate and we are able to maintain our spreads.

So I think it is a balance, but we do expect at least in the current environment, to many obtain a 200 basis points for the rest of the year.

As I said to others, you think about what was designed here over the last ten years in terms of the core Annuity product by MetLife in the sales force, you have close to $14 billion of balances which say to the client, we're going to do the right thing for you and the right thing for the company.

In effect, you get the annual variable rate resets.

Those clients are doing well in what they are earning.

And variable Annuities when you have that kind of money sitting there, those clients are doing very well in terms of what they're earning.

Variable Annuities that do not have this kind of futures are dealing with money market rates which are down to almost nothing, compared to getting something north of 3% right now out of this account with MetLife guarantee.

So this design is a long-term design, designed around these kinds of issues and markets and is working extremely well for everyone involved.

It is really something you can't do today.

It takes years and years to build this kind of capability.

The company has built it and it's working very well.

The point on the new fixed Annuities being offered at 1.5-2%.

Is there a lot of demand?

Do you price it for an expectation in a spike up in earlier withdrawals?

Can you talk about that a little bit?

Actually, Michelle, in terms of the product features and the products themselves, I don't think -- to say there is a demand for a particular level of guarantee on variable Annuities is probably focusing on the wrong thing relative to what the customer is looking for.

On the fixed side, rates are what they are.

We watch very closely the competition.

We know what people are doing and where they're moving toward, and we remain competitive.

The focus is on the feature of the contracts and the flexibility.

That's why we're selling the variable products we are.

We have time for one more question.

Thank you.

We have a question from Liz Werner (ph) from Sandler O'Neill.

Good morning.

I have a couple questions.

If you don't want to answer them, I understand, given the time.

The first was with regards to expense savings and some of the consolidation savings you outlined in your release.

I was wondering, going forward, how much benefit do you see in terms of your operating efficiencies?

Can you quantify that?

What can we look for over the next year or two?

Do you see further types of expense items related to either additional consolidations or severance?

If you can quantify that, that would be great, too.

I didn't catch your statutory earnings in the quarter.

If you have that, that would be helpful.

Lastly, I wanted to make sure I caught one thing right.

In talking about the impact of the current interest right environment on portfolio yields going forward, I think the comment was made that it would take three years to get to the current new money rate, assuming this sequential 10 basis point drop per quarter in portfolio yields.

When I think about the earnings impact of that, do I -- is it correct to assume that it's the crediting rate flexibility that gets you comfortable with that, or is it the amount of new business that you write at -- with lower credit rates and reach your target returns that offsets the impact on the portfolio yield overall?

Let me start off by making a general comment about our expense management efforts.

As we pointed out in the press release, we did have some charges for office consolidations.

I would say that's part of our overall expense management program.

You know, we lock at opportunities throughout the organization, and as we see these opportunities like these office consolidation, we take advantage of them.

So I couldn't predict right now what they would be.

We won't estimate any severance cost or other consolidation charge that is we might take, but, you know, obviously we are still locking at expense initiatives and expense management opportunities.

We'll take advantage of them as we identify them.

Let me give you the statutory earnings numbers for the second quarter and first half of the year.

The operating earnings for the second quarter we are 115, which is -- if you remember the first quarter number, which was 406 It is much lower than that number.

That has to do with the way income taxes are incurred on a statutory basis.

So, in effect, if the first quarter number was higher than an average and the second quarter lower, and a total for the first half of 521 of operating earnings is representative of what you would expect.

You just had a tax anomaly between the two quarters.

Then when you drop down to net income for the second quarter, it worked out to a loss of $2 million.

For the first half of the year, net income was 244.

Again, you see this effect of the way taxes are accrued or incurred on a statutory basis.

So when you look at that number, the other numbers that made up the increase in capital had to do with things in the investment portfolio, the unrealized portions in the investment portfolio and the way they're recognized on a statutory basis.

A key point that I need to make about the statutory number that is we give you -- in the future, we'll probably have to expand that, is that we're giving you the numbers just for the metropolitan Life Insurance Company.

As we un-stack our companies, that the earnings for the Metropolitan Life Insurance Company, which are unconsolidated with other numbers, represent only a portion of our statutory earnings.

In fact, the earnings of Metropolitan Life Insurance Company are depressed somewhat because of some inter-company reinsurance transaction particularly with the MetLife investors group.

So when you look at the numbers on a consolidated basis, they are somewhat higher than the numbers that I gave you.

Liz, your question on creditor rates, if I heard them.

This is Rob Henrikson.

If I heard them correctly.

Essentially, if you lock at our entire portfolio of Annuities and the six crediting rates, we capture and have been doing this for years in terms of the way the product is designed.

As the portfolio rate comes down, we actually are pricing such that we capture some of the decline in the rates in the market and move that rate gradually down.

Likewise, on the way up.

So the pricing in terms -- remember, these are nonparticipating products.

The pricing is sensitive to outside interest rates and intended to follow rates down slightly behind and, like ways, be able to move up along with market rates, and the duration of the underlying portfolios in all of our fixed Annuity products are fixed in this way, as Lee mentioned.

The only difference in that, of course, is when rates were down as substantially as they did.

They then looked at what the bottom line liability would be and moved those guarantee rates down and will continue to do so coming into September and so forth.

So that gives us the breathing room we need in order to maintain those margins

Okay.

That's very helpful.

Thank you very much.

I thank you all very much and look forward to seeing you next quarter.

Thanks.

Bye.

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